In part two of our discussion of the economic crisis and its impact on different sectors of the food industry we shine the spotlight on supermarkets, manufacturers, gourmet retailers and convenience stores.

Supermarkets

Supermarkets, as a whole, will be one of the least affected sectors in the wake of any further deterioration in economic conditions. Supermarkets do face the prospect of consumers ‘trading down’ within the store and reducing purchases of ‘non-essentials’ but, despite this, there are many positives.

To begin with, consumers will still be frequenting supermarkets on a regular basis. The high cost of fuel and desire to limit expenses will draw consumers toward more convenient shopping habits. Fewer trips but larger baskets has been a constant theme in consumer behaviour research worldwide this year and this will help larger outlets.

Supermarkets are also witnessing a boom in sales of prepared meals and other items suitable for home cooking as some consumers look to avoid the cost of getting fast-food or going to a restaurant. A Woolworths spokesman told The Australian this week that taco ingredients, pre-cooked chickens and budget-priced steaks were increasingly popular, along with cake mixes as a ‘night in’ becomes more common.

Such a trend has been picked up by research firms Freshlogic and Nielsen and it hasn’t been missed by Metcash CEO Andrew Reitzer either who reports that the downturn has failed to stagnate sales.

“If anything, it’s had an opposite effect as more people are eating out less and staying in for home-cooked meals,” Mr Reitzer told The Australian. “We have seen a slight increase in sales of home brands and products on special… This indicates that consumers are looking for bargains because of the financial uncertainties.”

Supermarket chains are increasing their private label commitment and a downturn will only further strengthen the market share of private label products. Foodland have just announced an enhanced commitment to private label goods, while Coles, Woolworths and Aldi, in particular, continue to grow their offerings.

Supermarkets have reported greater interest in private label since the beginning of the year and the flow on effect of customers ‘trading down’ is that it may redirect them to the cheaper private label goods (which have a greater margin for retailers) and consequently soften the impact of reduced in-store spend.

The proliferation of Aldi is significant as it symbolises the notion that consumers are increasingly looking for value. Aldi, due to their heavy focus on private label, are able to offer cheaper prices on basic staples and this has drawn consumers to the discount retailer. Whether their market share growth will flatten out when more prosperous times return is difficult to forecast, but they have certainly laid the foundations to become the third force behind Coles and Woolworths.

Non-essential items are likely to come under the scrutiny when consumers focus their attention on cost-cutting. Australian shoppers found to be cutting back on their expenditure (22%) were established in a recent Nielsen poll to be making small economies, cutting back on non-essential food items such as snack foods (79%), biscuits (72%) and chocolates (71%). Intriguingly, a Woolworths spokesman told The Australian that chocolate and confectionery remained popular amongst their customers. With consumers staying-in more often they may feel they are entitled to an indulgence or two, cushioning the impact on snack foods and desserts.

Specialty Stores

In spite of pressure from the supermarkets, many gourmet and specialty stores will still manage to find their way through the turbulence.

Gourmet food retailers have begun to thrive since the turn of the century, with economic prosperity driving many toward boutique food outlets. Many specialty/gourmet stores have developed strong customer loyalty in the past few years, as consumers have been drawn to stores with a focus on customer service and high quality products. Loyalty doesn’t just fade overnight – provided companies don’t do anything drastic to offend their customers – and specialty stores can therefore expect to retain many of their customers.

The downturn will, however, have an impact on some in the sector as there will be some consumers under increased financial stress, which will force them to head to the supermarket in preference to the specialty store. The ideology of fewer trips and larger baskets will be behind the decline in consumers frequenting specialty stores. Specialty stores in shopping centres will probably have the greatest shield from the downturn as consumers looking to cut down on fuel costs can head to the one centre and frequent a number of different specialty stores (and supermarkets).

Sales growth in the sector will fall below the lofty growth seen in recent years. The healthy eating message, which is seeping through to consumers, will assist a number of specialty stores, primarily those which position themselves as offering healthier and/or fresher products.

Manufacturers

There has been talk of enhanced pressure on manufacturers since the turmoil engulfed markets and damaged consumer confidence. Soaring food costs put substantial pressure on the bottom line earlier in the year, with changes to package sizes one of the strategies employed by some manufacturers.

Unfortunately, a downturn is going to have a significant impact on some sectors within the food and beverage manufacturing industry. A recent study from Nielsen into the thoughts of 100 senior leaders of FMCG companies established concern about the business environment had swelled. On a more positive note, profit was anticipated for the 08/09 financial year by most, with just three per cent expecting to record a loss for the year.

The pressure on many in the sector has been epitomised by the number of factory shut-downs and job cuts within the industry this year. Consolidation has also begun to occur and is likely to continue in some sectors.

Private label represents a threat, with market share growth expected throughout a downturn. The areas most susceptible are those with limited profit margins that are most impacted by an increase in shipping or raw materials and sectors with limited product differentiation. In the food categories, this dictates that egg, milk and cheese products are typically the top private label items. It comes as no surprise that one of the sectors that has seen the greatest consolidation in recent years has been the dairy industry given the proliferation of private label in the dairy sector over the past decade in particular.

Private label is making its mark but consumers appear unwilling to abandon national brands with great fervour, with brand loyalty allowing many food and beverage manufacturers to continue posting record profits.

Pricing is another concern for manufacturers as pricing decisions are more pivotal now than during the boom, with consumers more scrupulous with their purchase decisions. Market research firm TNS revealed the leading manufacturers in the UK had prospered in the past year from a focus on “affordable premium” goods. Indulgent products without an extreme price tag were seen as reasons for strong results from Heinz and Kellogg’s last year, according to TNS. Such strategies would appear suitable for the Australian market as Australian consumers have embraced more premium goods in the last decade and “affordable premium” goods would be likely to garner support amongst those looking to cut spend without making great sacrifices.

Manufacturers focussing on health and wellness have been among the best performers in the past year and will continue to reap benefits from their positioning as a “wellness” company rather than a merely a food or beverage company. It has been notable that among the leading food manufacturers to increase their brand value, according to market researchers, many have shown a greater interest in improving their health and wellness division including Heinz (with the help of their Weight Watchers brand), Nestle, and Danone.

The strong and wise, not the big, will cope with the downturn better than others in the industry. Understanding consumers and adapting to their changing preferences quickly and efficiently will ultimately ensure manufacturers prosper.

Convenience stores

Convenience stores are likely to be placed under greater strain as many customers seek to cut-back on non-essential items at petrol stations, according to A.C. Nielsen research.

The ‘Nielsen ShopperTrends Report’ revealed that the convenience channel has recorded declines in consumer patronage over the past year (to July) with only around 42 per cent of consumers claiming to have visited a convenience outlet in the past seven days in 2007, compared to over half (53%) in 2006.

The beforementioned trend of fewer trips and larger baskets could help convenience stores to a degree as consumers realise mid-week that they are short of a few items. Rather than head to the local supermarket many will still turn to convenience stores for a minor stock-up.

In short, the downturn is expected to impact negatively on food sales at c-stores but foodservice opportunities could avail themselves as consumers look to purchase goods at their petrol station when they fill-up to limit the number of trips they need to make.

Strategies to weather the downturn will be discussed next week.